Answer the next 6 questions using the following information:
Drill Quest, Inc. manufactures drill bits for the oil industry. Drill Quest uses cost-plus pricing to set the price of its bits. Currently Drill Quest applies a 50 percent markup on average total cost. Average variable cost of producing bits is constant and equal to $6,000 per bit. Total fixed cost at Drill Quest is $550,000. DrillQuest currently produces 690 bits. Statistical estimation of demand for Drill Quest brand bits produces the following linear demand equation (where Q is the number of bits demanded and P is the price of bits):
1. Using cost-plus pricing, Drill Quest prices its bits at $ per bit.
A. $10,195
B. $12,175
C. $797
D. $6,000
E. $6,797
2. Using the cost-plus price in question 2, Drill Quest earns profit of (approximately) $ by selling 690 bits.
A. $2,895,000
B. $2,345,000
C. $3,500,000
D. $3,895,000
E. $4,895,000
3. Use the MR = SMC approach to finding the profit-maximizing point on the demand for Drill Quest's bits. The profit-maximizing number of bits to sell is
A. 250
B. 300
C. 350
D. 400
E. 450
4. Use the MR = SMC approach to finding the profit-maximizing point on the demand for Drill Quest's bits. The profit-maximizing price to charge is $ per bit.
A. $15,000
B. $12,500
C. $10,378
D. $10,245
E. $10,000
5. Use the MR = SMC approach to finding the profit-maximizing point on the demand for Drill Quest's bits. The maximum possible profit is $ .
A. $2,895,000
B. $2,345,000
C. $3,500,000
D. $3,895,000
E. $4,895,000
6. If Drill Quest wishes to use cost-plus pricing, it can maximize profit by applying a markup of percent on .
A. 150 percent; AVC
B. 150 percent; ATC
C. 50 percent; AVC
D. 50 percent; ATC
E. 250 percent; AVC